Bitcoin having trouble shedding its dark side

Authorities say the online black-market bazaar Silk Road could be the tip of the iceberg when it comes to the criminal underworld using bitcoin for trading in illicit goods and services. On the "Dark Web," fake IDs, drugs, even hit men are all paid in bitcoin. CNBC's Mary Thompson explores why bitcoin is the currency of choice for criminal activity on the dark web and reports on the story of Mt. Gox, the largest bitcoin exchange, which shut down in February, leaving bitcoin investors holding the bag.

In the last year, bitcoin's grabbed headlines as much for its soaring price as for its link to the online underworld and crimes including fraud, Ponzi schemes and outright theft.

"I think anytime you have a new technology there's going to be criminals out there, or people out there, who are going to try to deceive the system," said attorney Keith Miller, who specializes in the emerging world of digital currencies.

Bitcoin is created and stored online. It provides users with a great deal of anonymity. While bitcoin transactions are posted, stored and identified by a unique set of digits and numbers on an open-sourced ledger called a block chain, the transactions and the digital wallets they originate from or are sent to have no link to an owner's name or address.

"The dark web is full of vendors who accept only, exclusively bitcoin," said former assistant U.S. attorney Danya Perry.

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A user scans a QR code on a smartphone, transferring bitcoins into their digital wallet.

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The dark web is an online haven for criminals that is rarely seen by everyday users of the Internet.

Enter the dark web and you can find sites advertising murder for hire and drugs for sale such as marijuana, cocaine, LSD and other hallucinogens. The websites can also link to computer hackers or sell counterfeit licenses and credit cards.

Perry, who has prosecuted hundreds of white-collar and money laundering cases, said it is not surprising that these vendors gravitate toward bitcoin because it allows them to cloak themselves in secrecy.

Over a 2½-year period Silk Road allegedly sold $1.2 billion worth of drugs and other illegal services, all paid for in bitcoin.

Ross Ulbricht, 29, was arrested, and charged on various counts linked to running Silk Road. The graduate school dropout has pleaded not guilty, with his lawyers alleging charges of money-laundering are invalid because there was no actual money involved, just bitcoin.

How regulators and lawmakers define the digital currency will pose problems for attorneys prosecuting bitcoin-related crime. Is it a currency? A commodity? Property or investment? All questions that will need to be answered if there is to be greater acceptance of the digital currency.

CNBC's Gary Kaminsky spent time with SEC's Bruce Karpati to learn more about his division, which investigates allegations of fraud committed by investment advisers. Kaminsky reports that if you're breaking the law, the agency will find you.